Limiting the distortionary effects of transaction taxes: Scottish stamp duty after the Mirrlees Review

Daniel Borbely (Lead / Corresponding author)

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Abstract

We investigate the distortionary effects of transaction taxes through a case study of the Scottish residential property market. We make use of four sources of variation in transaction tax rates present in recent Scottish tax systems: (1) jumps in tax liabilities at tax thresholds; (2) jumps in marginal tax rates at thresholds; (3) a tax announcement that created temporary tax saving opportunities; and (4) a shift to a more progressive transaction tax regime. Our results indicate that market participants are highly responsive to tax changes and are willing to change the price and timing of transactions when tax savings opportunities are present. We also find that progressive reform had a significant positive effect on transaction activity in the market segment where tax rates were reduced. However, the higher end of the market, where tax rates increased, was mostly unaffected by progressive reform, with the exception of the market for very expensive properties, where a negative effect is identified. Implications of our findings are that if governments want to make transaction tax regimes more efficient, progressive taxation might be a good way to limit distortionary effects, whilst also encouraging transaction activity in the lower end of the market.
Original languageEnglish
Pages (from-to)265-290
Number of pages26
JournalFiscal Studies
Volume42
Issue number2
Early online date13 May 2021
DOIs
Publication statusPublished - Jun 2021

Keywords

  • behavioural responses to taxation
  • notches and kinks in tax systems
  • property markets
  • transaction taxes

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